Difference between shall and effective interest rates? Do not let him be taken for a ride!

In the case of loans, a distinction is made between debit interest rates and effective interest rates. Banks often lure borrowers with low interest rates, but it is not uncommon for the borrower to pay on top, as the interest rates advertised by banks are debit rates. Banks often don't indicate in their loan offers what type of interest rate is meant. If the loan is granted, the borrower may experience disappointment and have to pay more because, after all, the effective interest rate will apply, which is higher than the borrowing rate. To be smart before the damage, before you sign a loan agreement, you should know the difference between debit and effective interest rate. This is the only way to see through the banks' tricks so you don't get ripped off.

The borrowing rate – the pure cost of borrowing

The debit interest rate is sometimes also referred to as nominal interest rate and represents the pure credit costs. Costs for certain payment methods as well as brokerage and processing fees are not yet included in the target interest rate. The borrowing rate is based on market interest rates, which in turn depend on the key interest rate set by the European Central Bank. A low prime rate results in low borrowing rates; furthermore, the borrowing rates also depend on the amount of the loan and the term of the loan. For some banks, the creditworthiness of the borrower also plays a role in determining the debit interest rate. The better the credit rating, the lower the borrowing rate. If the borrowing rate does not change during the entire term of the loan, it is called a fixed borrowing rate.

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What you should know about the effective interest rate

The effective interest rate tells you how expensive a loan actually is for you. The effective interest rate provides information on the total annual cost of your loan. Banks are obliged to indicate the effective interest rate in accordance with the European Union's Consumer Directive. Part of the effective interest rate is the debit interest rate, and it also includes brokerage and processing fees. The effective interest rate does not always apply to the entire term of the loan, but only to the beginning of the term. It is then an initial effective interest rate. However, the effective interest rate does not include all the costs that arise when a loan is taken out. Not included are residual debt insurance, appraisal costs, commitment interest or unscheduled repayment costs. The amount of the effective interest rate depends on the debit interest rate, the disbursement rate, the duration of the fixed interest period and the repayment rate.

Compare loan offers

If you want to take out a loan, it is important to save on credit costs. You should therefore obtain offers from several banks or use the free loan comparison on the Internet to compare the effective interest rate and thus the costs for the loans. However, an objective comparison can only be made if the general conditions such as term, loan amount and duration of the fixed interest rate are the same. In order to actually determine how expensive a loan will be, you should compare debit interest and effective interest at the different banks.

Conclusion: A distinction is made between debit and effective interest rates for loans. The borrowing rate is the pure cost of the loan, while the effective rate includes the borrowing rate, but also processing and brokerage fees. To determine how expensive a loan is for you, you should pay attention to the amount of the debit and effective interest rate before taking out a loan and compare the conditions at several banks. The creditworthiness of the borrower can affect the amount of the borrowing rate.

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